Are Wrongful Death or Personal Injury Settlements Taxable?

If you’ve been involved in an accident that wasn’t your fault, or lost a loved one due to someone else’s negligence, then you know what a life changing event that can be. Add dealing with lawyers, insurance companies, and acting as a plaintiff in a case on top of that and most people experiences years of grief, pain, and stress.

Ideally, in the end you have been able to receive compensation for your damages. But now what? Perhaps you have plans for how you’ll spend or save that money. But before you do anything, ask one very important question: Will I be taxed on this?

Settlements & Awards

The general rule is that that settlements or awards in such cases are intended to compensate the plaintiff for a loss that has already been sustained. As a result, that money is not treated as new income and is therefore not considered taxable income by the IRS.

Exceptions

As with everything, there are exceptions to the general rule. If you are unsure about your case, please consult a wrongful death lawyer Phoenix, AZ citizens trust.

  • Punitive Damages: if you were awarded punitive damages, that is money that is not necessarily meant to compensate you, but PUNISH the other party. This award may be taxed as income.
  • Breach of Contract: if your breach of contract caused your injury, you may be taxed on the damages awarded to you.
  • Emotional Injury Only: if your claim is only for emotional distress, not for a physical injury, then your settlement may be taxable.
  • Lost Wages: if a portion of your award was for lost wages or loss of income, that amount is taxable as income and must be reported.
  • Interest: any interest earned on money awarded is taxable.
  • Etc. . .

Every case is unique, and exceptions to the general rule may vary from state to state.

If your claim contained a variety of damages awarded, it may be difficult for you to know which portions are taxable and which portions are not. There is only one way to be sure and that is to hire an attorney.  If you hire legal representation, you’re not only more likely to receive a higher settlement, but you’ll also have a knowledgeable source on the taxability of your award.

 


We thank our contributors and friends at Kamper Estrada for their insight on this subject matter.

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